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tv   Inside Story  Al Jazeera  August 17, 2014 3:30pm-4:01pm EDT

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>> a number of u.s. corporations are claiming foreign countries as their home to save money on tacks. perfectly legal and politically explosive, these tax inversions are want "inside story." >> hello, i'm libby casey.
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myelin, electronics, they may not be household names, but they're among the 22 u.s. corporations to announce a tax inversion deal since 2011. by buying in a different country, they can move their operations overseas and pay lower rates. they can manufacture their products in the u.s., and sell primarily to u.s. consumers, and still officially call another country home. president obama said that it lacks patriotism. and they want them to crackdown. they say that the united states' high corporate rates are to blame. debate is heating up and it's as much about politics as dollars and cents. >> when some companies cherry picks their taxes, it damages the country's finances, adds to the deficit and makes it harder to invest in the things that will keep america strong, and it sticks you with the tab for what they stash offshore.
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>> reporter: in his wiki video address, president obama criticized crete buying at a lower tax rate and claims that new low-tax country as it's primary home. the president called it a renunciation of citizenship. >> rather than double down on the economics that allow a fortunate few to play by their own rules, let's rise and fall together as one nation, as one people. >> reporter: with inversion, the domestic earnings, the profits made in america, are still subject to u.s. tax rates, but once inversion takes place, the country no longer has to pay the almost 40% u.s. corporate tax rate front the money that they make in the international market. policymakers are attempting to halt a recent rise in the practice. perhaps most strikingly, there has been a 207% stake in healthcare inversions in the last year.
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there has been public pushback too, responding to online petitions, walgreen's decided last week that it would not seek an inversion as part of its purchase of the swiss company, alliance booth. ron wyden called the increase a symptom of a broken tax system. >> the u.s. tax code is infected with the chronic diseases of loopholes and inefficiency. these infections are hobbling america's drive to create more good wage, red white and blue jobs here at home. they are a significant drag on our economy, and are harming u.s. competitiveness. >> republicans like or not hatch say they're also frustrated but the issue needs to be dealt with competitiveness. >> as we consider reforms to our tax code, our primary goals should be to make the u.s. a
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better place to do business. i'm greatly concerned about these corporate inversions. the best way to solve this problem would be to reform our corporate and international tax system in a manner that would make our multinational has competitive against the foreign counterparts. and that would mean among other things a significant reduction in the corporate tax rate. and making our tax system more competitive. >> but with little hope on of congressional action, the treasury ep department is looking into how to slow inversions on its own. how much a rule change could impact the government's bottom line. but one congressional research team said that in over a decade, the u.s. stands to gain $20 billion in revenue if most inversions are prevented. there's a lot more to corporate tax inversions than that, and we want to be sure to sort it out.
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it's a complex and legal bottom line move for companies large and small. so we invited experts to help us. steven moschcowitz. and in washington, joshua smith, senior policy analyst. and in ne in new york, liz hoffa reporter for the world trade wall street journal. how much goes here and how much stays abroad? >> it's a company's decision. for the most part, we're not talking about a headquarters. that's a slightly different concept. this is a legal idea. some companies are going to move some assets, and some aren't. it depends on how mobile they are. and you will see that some of them have corporate jobs in the u.s., and some in manufacturing and distribution, and most of these companies are still going
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to need boots on the ground in the u.s., and they need staff and sales agents. and they have little to do with jobs, and more to do with corporate identity and corporate balancing issues. i want you to pick up on the jobs. does it have an impact in america? >> most of these inversions are just on paper. the headquarters are moving on paper. and the headquarters are here, and the manufacturing jobs are here, and the retail jobs are here. but what it means is that the federal government is losing out on revenue, and they employ lots of people in america, and that's revenue that can go missing and it's sort of a bank approach. >> joshua, what are the qualifications that a bank has to make? >> to merge with a smaller foreign company. and after it merge, the merged company has to be at least 20%
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owned by foreigners and have legitimate business going on in that country. and it has to prevent a company from say merging with a non-existent company that just has a mailbox in the cayman islands and isn't doing any business this. that law was signed by george w. george h.w george w.bush. >> what can take advantage of this? >> any type of company. the u.s. taxes people on worldwide income, and that means that if there's a company in the u.s. that does 90% of their business overseas, they still pay the irs 100 perfection. but if you have say an irish company that does 10% of its business here, they would pay to the irs 10% of their revenues. that's why it's so attractive, and why politically if they want to fix this, they need to bring
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down the tax rates and look at this taxing worldwide because most countries don't do that. that's what encourages, wait a minute, i have a tremendous competitive disadvantage, and i have a vehicle open to me and president obama says it's legal and he doesn't like it. and maybe somebody in living in an apartment doesn't like somebody writes off his homeowner deduction. it's a good law unless the tax rates come way down. >> josh, you're a critic of this. >> absolutely, i think it's wrong for a company to merge with a smaller competitor, and then move overseas. but the tax rate is the reason, it's 35%, which is high on the international standard. but the effective rate of what the companies actually pay is around 17% for multinationals that make a profit. so if you actually bring down
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the statutory rate, it won't at all discourage companies from doing the inversion deals. and it would actually bring up what some companies pay, inversions. >> i want to talk about the tax structure in a little while. but i want to look at the focus and who is using it. liz hoffman, we see a lot of mel companies talking about inversions and considering them, everything from mettronics and why? >> i should say that inversions can work for any type of company. they have been particularly popular among pharmaceutical companies for a variety of reasons. their distribution is global. and they have thought about their balance sheets in a global way for a long time. and if you're talking about a merger, there are a lot more companies for them to buy overseas. if you're talking about a lower localized economy or
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sector, it doesn't mean, and they have a lot of patents, they are constantly renewing their patent portfolio, and for a lot of reasons. income is intellectual property. and it's a lot easier to move around and to reassign to a foreign unit, to an affiliate and to record that revenue elsewhere. so we see that mostly in the mel and the pharmaceutical. and the other reason, when the competitors do it, there's an urge to merge, right? you have to keep pace with competitors, and there's a little bit of a cyclical effect where companies are looking at their major competitors, paying tax rates in the mid to high teens, and they're still paying in the mid to high 20s, and that's a disadvantage when investors. >> and steven moskowitz? >> what the company is doing,
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they're affecting their attractiveness on the stock market and making themselves more competitive, and they have the ability to invest more. it changes the whole structure of the business, and it makes them more exceptive and more attractive. it benefits the company and the shareholders, and again, you have to remember that the american tax is such a big portion of the profits. this is incredible on the balance sheet, the income market. >> we'll get to the response after the break, and we'll step away. but first, the argument for reform. should we move toward a flat tax rate or close loopholes? this is "inside story." request
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inversions to be pealing not only for deferral, but it globallizes them and how do you deal with the criticisms? >> what i would have done with walgreen's, i would have taken the $4 billion i would save, i would cut the places on the pharmaceuticals and i would see if the people would join with me. the same consumers would say this is terrific and their drug prices would come down, that's
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how i would handle it, share the wealth. possible. >> i don't think that it has anything to do with the rate. american corporations pay a fairly low effective rate. but there's this cash overseas, there's $2 trillion sitting overseas, and personally, i would end the system of deferral where companies only have to pay american taxes when they come home. but i would make sure that the american companies pay taxes on it when it's earned and therefore, you would increase government investments here at home. and that way today gain a lot of revenue and you could reduce the rates at that point. but the deferral is the problem is that we have to address, and not necessarily the rates. >> steven moskowitz, what's your response to that? >> i would go the other way and declare a tax holiday. i would have the companies bring back all of the investments, and
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we would pump it into the economy and have jobs and investments. there are two reasons for the tax code. one is for the government to collect revenue. but the other reason, in a democracy, the government can't order us to buy a factory or machinerier, so it would give us incentives. having a tax holiday, it would economy. t. >> we tried a repatriation holiday under the bush administration, and he said that companies need to reinvest and a lot of it went in dividends and increasing in the stock price, and it didn't help. in addition, to incentivize, the $2 trillion hoard overseas, they assume that there's going to be another repatriation tax holiday in the future. if we have it now, it's going to be the same thing again, that the companies will keep the money overseas and wait for the
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next holiday, so 2 doesn't seem like a good solution to me. >> maybe we can agree to disagree, but the idea is in drafting it, instead of the government pouring money into companies, and president obama has complained. look at general motors that had an off-shoot, and the same president that's complaining with delphi, they have money overseas. the bottom line, if you just draft today properly, you can have so much invest. and even dividends are not bad because they go into the economy. >> liz, why the uptick in companies using inversions over the last couple of years? >> a lot of reasons. a lot of companies tell you that it's a one-off decision for them. in the last 6-10 months, the acquisitions are rising in a large way. companies have been sitting on a lot of cash, and have been pretty cautious in the last couple of years. you're seeing boards looking at low rates of growth and trying
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to make money for them and their shareholders, and so buying something is a good way to do that. and it's a lot easier to grow that way. if you're thinking about ways to buy, there's a huge hunger for efficiency and to grow your profits in a way that is lean and efficient and smart. so there has been a real look for ways that you can sculpts costs without really gutting the business. and tax synergies, they call it financial engineering but it really does work and save money. so some of it is activity coming back, and some of it is companies being smart about what they buy. >> liz, how much talk is there about big picture tax reform? we talk about the code and relating to inversions a little bit. but we heard from our panelists a desire for big reform. is there any chance? >> you know, people think it's
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very unlikely this year, and probably pretty unlikely next year. there are a lot of minor disagreements, but in broad strokes, democrats would like to close this window as a one-off. republicans would like to see it done as part of a broader reform that would lower the corporate rate and provide incentives for research. so it's an election year, and it seems pretty unlikely. this has turned into a lil issue, and most companies that are thinking about this are feeling pretty good. if they can get it closed by year end they would be fine, and retroactive, it has some people spooked. but the reason you're seeing it in the last couple of months, companies are going to get this done and not wait for the window to eventually close of. >> and to pick up on that, you say it has some companies spooked and shareholders spooked
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and what sort of action does that inspire them? does it speed up the process of trying to take an inversion or rein it back in? >> you hit it, both. it depends on how committed they were to the deal in the first place, and some of these deals, the companies have said that they make sense even without the tax perks. icing on the cake, but not to make the strategic sense. so it's a little bit of a stretch, but it depends on the core of the game plan for the company. i think that some people are putting on the brakes and some are hitting the gas, and that's the interesting dynamics that we have seen. >> we'll take a short break, and when we come back, we'll dig deeper into the politics of corporate inversions. this is "inside story."
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we're looking at corporate taxes on this edition of the program. specifically the practice of inversion, when a corporation buys an entity overseas to pay lower taxes on profits. well, president obama said this practice lacks economic patriotism. and we want to talk about the politics of this issue. still with us in san francisco, steven moskowitz, senior partner and tax attorney at moskowitz llp. and in new york, liz hoffman, reporter. >> what are it's chances of the bill? >> senator leavitt's bill and his brother in the house have both introduced bills so that when an american company merge was a foreignen company, it
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would have to be at least 50% owned by foreign stock. that makes sense, to get the advantages of being in a foreign company. foreigners. >> right now it's 20%. >> this is one that i support but i would be very surprised if congress ends up voting on it any time soon. >> steven moskowitz, i want to get your opinion, but also, how should the white house act on it? president obama talking about his pen and his phone and executive action. >> it's true, but what i would like to remind the president, the united states supreme court spoke on this many years ago when it said that we didn't even have a patriotic duty to may a penny more than we have to. these laws were put in place for a variety of reasons and one is economics. the bottom line is we don't have a patriotic duty to pay more, and these are the laws.
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and i don't think that the congress is going to bring it up to 50 perfection. it's not doing anything right now, and the bottom line, this is good for business and we want the control for the companies and we don't want the changes. these laws have been around for many many years, and what happens, as soon as someone puts in a change, someone else will figure out a way around it. again f. we had a lowering of the tax rate, we wouldn't have these problems, and more economic investment in this countryish rather than all of the money going overseas. >> why the change for companies? why is it so unpeeling from your perspective. >> because it makes it far more difficult for the existing company to do something. and again, look at my original example of a purely american company that only does 10% of its business here, and 90% overseas. it's taxed on 100%, and the same
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identical company is taxed on only the 10. it hurts our competitiveness, and especially now in the global market, worldwide competition is so important. we have to be able to compete and not be hampered by these tax laws. >> liz hoffman, what could the treasury do on its own? i it's not clear. people have different ideas, and there seems to bel leeway of how certain didn't instruments are traded. right now, you can be tax on the u.s. income, but what you can do is have a u.s. subsidiary that's not a u.s. company essentially borrow from the foreign parent. and anything on the debt, they can deduct it from their taxes so it helps to lower their tax burden here in the u.s. there seems to be room in that, how much interest they can write
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off, which would be effective in attractive. >> any chance that the corporations may try to go against inversions to get the american field approval? saying that they could get a non-desertion agreement, saying i'm staying in america. >> they don't necessarily have a patriotic duty. walgreen's decided not to convert because they faced pressure from consumers and on the hill. and they have to do it. whereas a lot of companies don't have the same name recognition and they don't center a patriotic duty. as long as they follow the laws, it's okay to invertase they see fit. i believe that the law should change, but they're not going to slow the inversions down unless congress makes them. >> thank you for watching "inside story," thank you for being with us.
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